It is believed that procurement of goods and services have traditionally involved high transaction costs. The cost of finding and qualifying potential bidders has been particularly high. The advent of electronic commerce has introduced new methods of procurement that lower some of the transaction costs associated with procurement. Electronic procurement, and in particular business-to-business electronic procurement, matches buyers and suppliers and facilitates transactions that take place on networked processors.
In a “forward” auction, there may be multiple buyers competing for the same products and services. As such, bid prices may start low and move upward as each buyer competes until closing. On the other hand, in a supplier-bidding auction, which may also be known as a “reverse” auction, bid prices may start high and move downward as suppliers interact to establish a closing price. This model of auction marketplace is often one-sided, i.e., one buyer and many potential suppliers.
It is believed that, typically, the products being purchased in the auction marketplace are components or materials. “Components” may mean fabricated tangible pieces or parts that become part of assemblies of durable products. Example components include gears, bearings, appliance shelves, or door handles. “Materials” may mean bulk quantities of raw materials that are further transformed into product. Example materials include corn syrup or sheet steel.
Industrial buyers may not want to purchase one component at a time. Rather, they may purchase whole families of similar components. These items may therefore be grouped into a single lot. Suppliers in industrial auctions may provide unit price quotes for all line items in a lot. In theory, a supplier with the lowest bid is awarded with the contract from the buyer.
In many types of business transactions, however, price may not be the sole parameter upon which a decision is made. There are, in fact, many reasons that a buyer in an auction may favor and choose one particular supplier over other suppliers. For instance, a buyer may favor a supplier that the buyer had dealt with previously, even if that previous engagement was outside the auction setting. In the negotiations for a supply contract, therefore, a buyer may compare various proposals not only on the basis of price, but also on the basis of the non-price characteristics of non-standard goods, the location of the supplier, the reputation of the supplier, the prior relationship between the supplier and the buyer, etc. It is believed that these non-price “characteristics” typically represent risks to a buyer (a sponsor), of which the sponsor attempts to minimize. In its attempt to minimize these risks, the sponsor may ultimately make an award to a favored bidder, such as an incumbent supplier, over a lower bidding non-favored bidder, such as a non-incumbent bidder.
This may be true even when a lower bidding, non-favored bidder is offering a high quality product or service that is comparable to or superior to that of an incumbent bidder. By awarding a contract to an incumbent supplier over a lower bidding non-favored bidder, it is believed that the sponsor is effectively stating that there was not enough of a price difference between the incumbent supplier and the lower bidding, non-favored bidder to justify the risks associated with bringing on a new supplier.
It is important to note, however, that the sponsor may be willing to award the contract to a lower bidding non-favored bidder if the “spread” between the non-favored bidder and the favored bidder justifies the risks associated with bringing on a new supplier. That is, if a non-favored bidder outbids the favored bidder by at least the amount equal to the spread, it is highly probable that the non-favored bidder be awarded with the contract. The problem is that a non-favored bidder, in general, may not be aware of this information. As a result, favored bidders are frequently re-awarded with contracts and other bidders become frustrated and stop bidding competitively, thereby resulting in a non-competitive bidding process.
Thus, it is believed that there is a need for a system and method of promoting competitive bidding in an auction having a favored bidder. It is believed that there is a further need for a system and method of effectively quantifying the sponsor's risks of switching from a favored bidder to a non-favored bidder. It is believed that there is yet a further need for a system and method for effectively communicating these quantified risks to bidders, who can then use the information to bid more competitively.